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business
south western federal taxation

Questions and Answers of South Western Federal Taxation

Zorn conducted his professional practice through Zorn, Inc. The corporation uses a fiscal year ending September 30 even though the business purpose test for a fiscal year cannot be satisfied. For the
Shumpert, Inc., entered into a contract that was to take two years to complete, with an estimated cost of $900,000. The contract price was $1,300,000. Costs of the contract for 2018, the first year,
Jebali Corporation, a calendar year taxpayer utilizing the completed contract method of accounting, constructed a building for Samson, Inc., under a longterm contract. The gross contract price was
In 2019, Skylar sold an apartment building for $20,000 cash and a $300,000 note due in two years. Skylar’s cost of the property was $250,000, and he had deducted depreciation of $150,000, $60,000
On December 30, 2019, Whitney sold a piece of property for $85,000. Her basis in the property was $40,000, and she incurred $1,200 in selling expenses. The buyer paid $5,000 down with the balance
For 2019, Essence Company, a calendar year taxpayer, will change from using the cash method for tax purposes to the accrual method. At the end of 2018, Essence showed the following items.Accounts
In 2019, Chaya Corporation, an accrual basis, calendar year taxpayer, provided services to clients and earned $25,000. The clients signed notes receivable to Chaya that have a fair market value of
In 2019, Aurora received a $25,000 bonus computed as a percentage of profits. In 2020, Aurora’s employer determined that the 2019 profits had been incorrectly computed, and Aurora had to refund the
Delaine is a 90% shareholder in a personal service corporation (PSC). The corporation paid Delaine a salary of $265,000 during its fiscal year ending September 30, 2019.a. Assume that the corporation
In December 2019, Carl Corporation sold land it held as an investment. The corporation received $50,000 in 2019 and a note payable (with adequate interest) for $150,000 to be paid in 2021. Carl
On June 1, 2017, Father sold land to Son for $300,000. Father reported the gain by the installment method, with the gain to be spread over five years. In May 2019, Son received an offer of $400,000
Samantha, an accrual basis taxpayer, subscribes to a service that updates a database used in her business. In December 2019, Samantha paid the $120,000 subscription for the period January 2019
In 2019, the taxpayer became ineligible to use the cash method of accounting. At the beginning of the year, accounts receivable totaled $240,000, accounts payable for merchandise totaled $80,000,
In December 2019, Nell, Inc., an accrual basis taxpayer, paid $12,000 for insurance premiums for the 2020 calendar year. How much of the premiums can Nell, Inc., deduct in 2019?
Fred, a cash basis taxpayer, received a $15,000 bonus from his employer in 2019. The bonus was based on the company’s profits for 2018. In 2020, the company discovered that its 2018 profits were
A law practice was incorporated on January 1, 2019, and expects to earn $25,000 per month before deducting attorney Shonda’s salary. Shonda owns 100% of the stock in the practice. The corporation
In 2019, your client, Clear Corporation, changed from the cash to the accrual method of accounting for its radio station. The company had a positive § 481 adjustment of $2.4 million as a result of
Elliot operates his clothing store as a single member LLC (which he reports as a sole proprietorship). In 2019, his proprietorship generates qualified business income of $280,000, he pays W–2 wages
Ting is a CPA and a single taxpayer using the standard deduction. In 2019, her CPA practice generates qualified business income of $162,200; she records no other income or losses. Ting’s taxable
Susan, a single taxpayer, owns and operates a bakery as a sole proprietorship. The business is not a specified services business. In 2019, the business pays $100,000 in W–2 wages, holds $150,000 of
Diego and Molly are married and will file a joint return. Diego earns $300,000 from his single member LLC (a law firm), which the tax law treats as a sole proprietorship. Wages paid by the law firm
Stella Watters is a CPA and operates her own accounting firm (Watters CPA LLC). As a single member LLC, Stella reports her accounting firm operations as a sole proprietor. Stella has QBI from her
Scott and Laura are married and file a joint tax return. Laura owns a sole proprietorship (not a “specified services” business) that incurs qualified business income of $300,000. The
Donald owns a wide variety of commercial rental properties held in a single member LLC. Donald’s LLC reports rental income of $1,500,000. The LLC pays no W–2 wages; rather, it pays a management
Ashley (a single taxpayer) is the sole owner of ABC LLC. The LLC (treated as a sole proprietorship for Federal income tax purposes) reports QBI of $900,000 and is not a “specified services”
Prakash Samuels owns and manages his single member LLC that provides a wide variety of financial services to his clients. He is married and will file a joint tax return with his wife, Amy. The LLC
Shelly reports $200,000 of QBI from her local jewelry store (a sole proprietorship). Shelly’s proprietorship paid $30,000 in W–2 wages and owns $20,000 of qualified property. Shelly’s spouse
Purple Company records $200,000 in net income for 2019 before deducting any compensation or other payment to its sole owner, Kirsten. Kirsten is single, and she claims the $12,200 standard deduction.
Henry, a freelance driver, finds passengers using various platforms such as Uber and Grubhub. He is single and has no other sources of income. In 2019, Henry’s qualified business income from
Jason and Paula are married. They file a joint return for 2019 on which they report taxable income before the QBI deduction of $200,000. Jason operates a sole proprietorship, and Paula is a partner
Thad, a single taxpayer, reports taxable income before the QBI deduction of $190,700. Thad, a CPA, operates an accounting practice as a single member LLC (which he reports as a sole proprietorship).
In 2019, Meghann Carlson, a single taxpayer, reports QBI of $110,000 and modified taxable income of $78,000 (this is also her taxable income before the QBI deduction). What is Meghann’s QBI
Jane and Ben are married and usually file a joint return. They live in a separate property state (rather than a community property state). Jane is a partner in a law firm and typically generates
Calculate the taxpayer’s 2019 qualifying business income deduction for a qualified trade or business.Filing status: SingleTaxable income: $180,000Net capital gains: $0Qualified business income
Calculate the taxpayer’s 2019 qualifying business income deduction for a qualified trade or business.Filing status: SingleTaxable income: $100,000Net capital gains: $0Qualified business income
Which of the following is true about the qualifying business income (QBI) deduction for taxpayers with taxable income above the taxable income limitations?a. If the taxpayer is a specified service
Which of the following statements is true regarding taxpayers with taxable income below the taxable income limitations for the qualifying business income (QBI) deduction?a. QBI deduction is allowed
What is the basic calculation for the qualifying business income deduction?a. 30% × Qualifying business income (QBI)b. 20% × W–2 wagesc. 20% × Qualifying business income (QBI)d. 30% × W–2
Which of the following is considered a specified service trade or business (SSTB) for purposes of the qualifying business income deduction?a. Accounting firmb. Manufacturing companyc. Engineering
Tan Corporation purchased depreciable tangible personal property for $100,000 in 2017 and immediately expensed the entire cost under § 179. In 2019, when the property was worth $80,000, Tan
Dedriea contributes to her wholly owned corporation some tangible personal property she had used in her sole proprietorship business and depreciated. She had acquired the property for $566,000 and
Miguel receives tangible personal property as an inheritance in 2017. The property was depreciated by the deceased (Miguel’s father), and Miguel will also depreciate it. At the date of the
Anna received tangible personal property with a fair market value of $65,000 as a gift in 2017. The donor had purchased the property for $77,000 and had taken $77,000 of depreciation. Anna used the
On January 1, 2010, Stephanie Bridges acquired depreciable real property for $50,000. She used straight-line depreciation to compute the asset’s cost recovery. The asset was sold for $96,000 on
Larry is the sole proprietor of a trampoline shop. During 2019, the following transactions occurred:• Unimproved land adjacent to the store was condemned by the city on February 1. The condemnation
On May 2, 1989, Hannah Weather (Social Security number: 111-22-3333) acquired residential real estate for $450,000. Of the cost, $100,000 was allocated to the land and $350,000 to the building. On
On June 1, 2015, Skylark Enterprises (not a corporation) acquired a retail store building for $500,000 (with $100,000 being allocated to the land). The store building was 39-year real property, and
On December 1, 2017, Lavender Manufacturing Company (a corporation) purchased another company’s assets, including a patent. The patent was used in Lavender’s manufacturing operations; $49,500 was
Copper Industries (a sole proprietorship) sold three ? 1231 assets during 2019. Data on these property dispositions are as follows: a. Determine the amount and the character of the recognized gain
Siena Industries (a sole proprietorship) sold three ? 1231 assets during 2019. Data on these property dispositions are as follows: a. Determine the amount and the character of the recognized gain
Keshara has the following net ? 1231 results for each of the years shown. What would be the nature of the net gains in 2018 and 2019? Tax Year Net 5 1231 Loss Net § 1231 Galn 2014 $18,000 2015
Gray, Inc., a C corporation, has taxable income from operations of $1,452,000 for 2019. It also has a net long-term capital loss of $355,000 from the sale of a subsidiary’s stock. The year 2019 is
Asok’s AGI for 2019 is $133,250. Included in this AGI is a $45,000 25% long-term capital gain and a $13,000 0%/15%/20% long-term capital gain. Asok is single and uses the standard deduction.
For 2019, Wilma has properly determined taxable income of $36,000, including $3,000 of unrecaptured § 1250 gain and $8,200 of 0%/15%/20% gain. Wilma qualifies for head-of-household filing status.
Jane and Blair are married taxpayers filing jointly and have 2019 taxable income of $107,000. The taxable income includes $5,000 of gain from a capital asset held five years, $2,100 of gain from a
For 2019, Ashley has gross income of $38,350 and a $5,000 long-term capital loss. She claims the standard deduction. Ashley is 35 years old and unmarried with two dependent children. How much of
Helena has the following long-term capital gains and losses for 2019: $65,000 28% gain, $53,000 28% loss, $28,000 25% gain, and $24,000 0%/15%/20% loss. She also has a $33,000 short-term loss and a
Paul has the following long-term capital gains and losses for 2019: $62,000 28% gain, $21,000 28% loss, $18,000 25% gain, and $64,000 0%/15%/20% gain. He also has a $53,000 short-term loss and a
Phil and Susan Hammond are married taxpayers filing a joint return. The couple have two dependent children. Susan has wages of $34,000 in 2018. Phil does not work due to a disability, but he is a
In 2019, Bertha Jarow had a $28,000 loss from the sale of a personal residence. She also purchased a patent on a rubber bonding process from an individual inventor for $7,000 (and resold it in two
Elaine Case (single with no dependents) has the following transactions in 2019:AGI (exclusive of capital gains and losses)...........$240,000Long-term capital
Dennis sells short 100 shares of ARC stock at $20 per share on January 15, 2019. He buys 200 shares of ARC stock on April 1, 2018, at $25 per share. On May 2, 2019, he closes the short sale by
Roger inherited 100 shares of Periwinkle stock when his mother, Emily, died. Emily had acquired the stock for a total of $60,000 on November 15, 2015. She died on August 10, 2019, and the shares were
Maria held vacant land that qualified as an investment asset. She purchased the vacant land on April 10, 2015. She exchanged the vacant land for a rental house in a qualifying like-kind exchange on
Consuela was a tenant in a campus apartment. She is a student at State University. Her lease began on August 1, 2019, and was due to expire on July 31, 2020. However, her landlord sold the building,
Hilde purchased all of the rights to a patent on a new garden tool developed by a friend of hers who is an amateur inventor. The inventor obtained the patent rights, set up a manufacturing company to
Carla was the owner of vacant land that she was holding for investment. She paid $2,000,000 for the land in 2017. Raymond was an investor in vacant land. He thought Carla’s land might be the site
Benny purchased $400,000 of Peach Corporation face value bonds for $320,000 on November 13, 2018. The bonds had been issued with $80,000 of original issue discount because Peach was in financial
Melaney has had a bad year with her investments. She lent a friend $8,000; the friend did not repay the loan when it was due and then declared bankruptcy. The loan is totally uncollectible. Melaney
Maria meets all of the requirements of § 1237 (subdivided realty). In 2019, she begins selling lots and sells four separate lots to four different purchasers. She also sells two contiguous lots to
Pebble Securities is a corporation that buys and sells financial assets. It purchases notes receivable from manufacturers that need cash immediately and cannot wait to collect the notes. Pebble pays
Enzo is a single taxpayer with the following gains and losses for 2019:• $2,100 short-term capital loss.• $24,000 long-term capital gain from sale of stock.• $14,000 § 1231 gain that is all
An apartment building was acquired in 2010. The depreciation taken on the building was $123,000, and the building was sold for a $34,000 gain. What is the maximum amount of 25% gain?
Sissie owns two items of business equipment. Both were purchased in 2015 for $100,000, both have a 7-year MACRS recovery period, and both have an adjusted basis of $37,490. Sissie is considering
Jacob purchased business equipment for $56,000 in 2016 and has taken $35,000 of regular MACRS depreciation. Jacob sells the equipment in 2019 for $26,000. What is the amount and character of
Renata Corporation purchased equipment in 2017 for $180,000 and has taken $83,000 of regular MACRS depreciation. Renata Corporation sells the equipment in 2019 for $110,000. What is the amount and
Elliott has the following capital gain and loss transactions for 2019.Short-term capital gain....................................$ 1,500Short-term capital
Coline has the following capital gain and loss transactions for 2019.Short-term capital gain...................................$ 5,000Short-term capital
Shen purchased corporate stock for $20,000 on April 10, 2017. On July 14, 2019, when the stock was worth $12,000, Shen died and his son, Mijo, inherited the stock. Mijo sold the stock for $14,200 on
On May 9, 2019, Glenna purchases 500 shares of Ignaz Company stock for $7,500. On June 30, 2019, she writes a call option on the stock, giving the grantee the right to buy the stock for $9,000 during
Thomas receives tangible personal property as an inheritance from a decedent who died in 2019. The property was depreciated by the deceased, and Thomas will also depreciate it. At the date of the
If depreciable equipment used in a business is sold at a recognized gain on July 10, 2019, and it was purchased on August 21, 2018, does § 1245 depreciation recapture apply to the asset? Explain.
Review Examples 50 and 52 in the text. In both examples, the taxpayer’s AGI is $129,400 even though in Example 52 there is $700 of nonrecaptured § 1231 loss from 2018. Explain why the two AGI
Steven established a sole proprietorship in 2013. He sold § 1231 assets at a loss in 2017 and 2018. He had only sold § 1231 assets at a gain before 2017. In 2019, he could sell a § 1231 asset at a
An individual taxpayer had a net § 1231 loss in 2019. Could any of this loss be treated as a long-term capital loss? Why or why not?
Hakim’s rental building (a § 1231 asset) was not insured when it was destroyed by a hurricane. His adjusted basis for the building was substantial but was less than he had paid for the building in
Lloyd owns a beach house (four years) and a cabin in the mountains (six years). His adjusted basis is $300,000 in the beach house and $315,000 in the mountain cabin. Lloyd also rents a townhouse in
Wesley, who is single, listed his personal residence with a real estate agent on March 3, 2019, at a price of $390,000. He rejected several offers in the $350,000 range during the summer. Finally, on
Karl purchased his residence on January 2, 2018, for $260,000, after having lived in it during 2017 as a tenant under a lease with an option to buy clause. On August 1, 2019, Karl sells the residence
Wanda, a calendar year taxpayer, owned a building (adjusted basis of $250,000) in which she operated a bakery that was destroyed by fire in December 2019. She receives insurance proceeds of $290,000
Edith’s warehouse (adjusted basis of $450,000) is destroyed by a hurricane in October 2019. Edith, a calendar year taxpayer, receives insurance proceeds of $525,000 in January 2020. Calculate
Mitchell, a calendar year taxpayer, is the sole proprietor of a fast-food restaurant. His adjusted basis for the building and the related land is $450,000. On March 12, 2019, state authorities notify
In two unrelated transactions, Laura exchanges property that qualifies for like-kind exchange treatment. In the first exchange, Laura gives up land purchased in May 2017 (adjusted basis of $20,000;
Tanya Fletcher owns undeveloped land (adjusted basis of $80,000 and fair market value of $92,000) on the East Coast. On January 4, 2019, she exchanges it with Lisa Martin (an unrelated party) for
Tyneka inherited 1,000 shares of Aqua, Inc. stock from Joe. Joe’s basis was $35,000, and the fair market value on July 1, 2019 (the date of death) was $45,000. The shares were distributed to Tyneka
Helene and Pauline are twin sisters who live in Louisiana and Mississippi, respectively. Helene is married to Frank, and Pauline is married to Richard. Frank and Richard are killed in an auto
Dan bought a hotel for $2,600,000 in January 2015. In May 2019, he died and left the hotel to Ed. While Dan owned the hotel, he deducted $289,000 of cost recovery. The fair market value in May 2019
As sole heir, Dazie receives all of Mary’s property (adjusted basis of $11,400,000 and fair market value of $13,820,000). Six months after Mary’s death, the fair market value is $13,835,000.a.
On September 18, 2019, Gerald received land and a building from Frank as a gift. No gift tax was paid on the transfer. Frank?s records show the following: a. Determine Gerald?s adjusted basis for
Roberto has received various gifts over the years and has decided to dispose of several of these assets. What is the recognized gain or loss from each of the following transactions, assuming that no

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